David Flandro, Global Head of Business Intelligence and Lara Mowery, Head of Property Specialty

Heavy insured losses sustained during the first five months of last year created a turbulent Florida renewal at June 1, 2011. Catastrophe model changes and global loss activity in the run-up to last year’s renewal created a firming and volatile market with market quoting behavior and individual program pricing showing a wide range of outcomes. There was general agreement that the market ended up 5 percent to 10 percent on average.

This year, while the January and April renewals continued the trend of generally increasing pricing, renewals have become flatter at June 1 with very light catastrophe losses to date contributing to plentiful capacity.

Quoting Volatility Moderated from the 2011 Market

Analysis of June 1, 2012, leading markets’ quoting behavior reveals a continued shift in the once cohesive view of Florida pricing, reflecting markets’ more precise focus on individual company characteristics and variation in risk measurement as a result of customized use of model output. However, this year’s renewal does not reflect the degree of variation that was evident a year ago when reinsurers had to respond in a very shortened timeframe to conditions impacting their view of risk and capacity deployment tolerance.

In 2009 and 2010, variation from the average quote for Florida renewals was consistently within a range of down 3 percent to up 3 percent from the average. Last year, that volatility increased five-fold for the Florida renewals. In 2012, the range has moderated to down 7 percent to up 6 percent from the average.

In Figure 1, the 2012 average quote across all programs is represented by the line at 0 percent, while the red dots indicate the reinsurers’ distances from the average across all the programs that they quoted. The size of the line represents the variability from the average for all quotes provided by the reinsurer. Each reinsurer is represented across the bottom of the chart by its A.M. Best rating.

Figure 1

While the quoting behavior analysis does not indicate any pricing direction in the market as each reinsurer is measured from the average quote on the program, it does provide support for the idea of a more tailored approach by many reinsurers to each individual renewal. As also noted in the January and April renewal analyses reinsurers are implementing more sophisticated approaches using custom risk measures, based on their own research and experience.

Pricing Stable to Slightly Up Year on Year

The more significant Florida renewal price increases indicated by some in the industry earlier in the year did not materialize, although pricing was up slightly on average. As mentioned, this was influenced by low catastrophe losses through the first five months of 2012, contributing to positive reinsurer results and more plentiful capacity.

General perceived price adequacy prior to the Florida renewal season also had an impact. As Florida is the peak zone globally, pricing has historically tended to reflect that peak zone risk. In addition, capacity available from non-traditional sources such as Guy Carpenter’s county weighted industry loss product, CWIL®, was more prevalent in the market this year. This also mitigated pricing pressure as less traditional capacity was needed where non-traditional limit was utilized.

Non-Florida Renewals Display Substantial Volatility

The June 1 renewal discussion is generally dominated by a focus on the outcome in Florida. However, there are several renewals that are not predominantly Florida accounts. Quoting behavior was more varied for these accounts, likely reflecting the difference in reinsurer appetites across a group of renewals exposed to a broader geographic base and significantly diverse business focus.

Figure 2

The change in pricing on these renewals was heavily dependent on the particular circumstances of the individual account and showed a wide degree of variation.